Credit Card Cross Fees To Fall To 0.7%

The agreement will cost the credit cards NIS 350 million in annual revenue.

Credit card cross fees will gradually fall to 0.7% in 2014, and stay at that level through 2018, according to the agreement reached between the Antitrust Authority and the credit card companies. They will submit the agreement to the Restraint of Trade Tribunal for approval within a few days.

The agreement will cost the credit cards NIS 350 million in annual revenue, 10% of their current revenue.

“This isn’t good for us, but the regulator is stronger than we are,” said the CEO of one company. The companies reportedly set a red line of a 0.75% cross fee, but agreed to compromise, since the agreement is for seven years, and provides certainty through 2018.

Antitrust Authority director general David Gilo also compromised. In May, Antitrust Authority chief economist Dr. Shlomi Frizet advised lowering the cross fee to 0.638%. The Antitrust Authority agreed to the higher level partly because of the company tax hike.

In the economic paper submitted to the Restraint of Trade Tribunal, Frizet assumed a future drop in the company tax to 19%, on the basis of the government’s tax cutting plan. However, in the wake of the summer’s social protest and the Trajtenberg Committee’s recommendations, the company tax was raised to 25%, beginning in 2012.

Under the new plan, credit card cross fees will fall from the current rate of 0.875% to 0.8% in July 2012, 0.75% in January 2013, 0.73% in November 2013, and 0.7% in July 2014, and stay at that level through the end of 2018. After the court approves the agreement, Israel’s three credit card companies can operate as a transaction clearing cartel through 2018.

The Antitrust Authority and the three credit card companies – Isracard Ltd., owned by Bank Hapoalim (TASE: POLI); Leumi Card Ltd., owned by Bank Leumi (TASE: LUMI) and Azrieli Group Ltd. (TASE: AZRG), and Israel Credit Cards-Cal Ltd. (ICC-Cal) (Visa), owned by Israel Discount Bank (TASE:DSCT), and First International Bank of Israel (TASE: FTIN) – negotiated the issue of cross fees for years. In 2006, the parties reached a deal to gradually reduce the fee from 1.25% to 0.875% over six years.

The parties also agreed that the fee, which is a restraint on trade, would be set by the Restraint of Trade Tribunal. In August 2011, Judge Nava Ben Or brought the last reduction forward by eight months from July 2012 to November 2011.

Israel’s credit card market has an annual turnover of NIS 200 billion. Since the reduction in cross fees will result in an equivalent reduction in clearance fees paid by businesses, in theory, a 0.1% reduction in the cross fee should reduce the credit card companies’ revenue by NIS 200 million. However, there is a risk that businesses might not pass the savings onto consumers, as the fee amounts to a tiny fraction of the price of goods.

The cross fee, which a credit card company charges a business for transactions by a customer is paid to the company that issued the customer’s card. This fee is the basic expense of the clearing company, and is therefore the lower limit of the clearing fee that the credit card company charges businesses.